Using a Cash Wedge to Manage your Income

Posted 11 Sep 2020 by Patricia Bell, PFP

When markets are fluctuating, it makes a big difference to your long-term plan whether you’re adding or withdrawing funds from your portfolio. As Lorna discussed in her article, Dollar Cost Averaging is a great strategy to take advantage of market ups and downs while you’re putting money in. 

But what happens when it’s time to enjoy those savings we diligently squirreled away every month? How do we protect our portfolios from those same ups and downs while supplementing our monthly income?

By using a strategy called the “Cash Wedge”, we aim to lessen the impact of market fluctuations within your registered portfolio when taking income.

Essentially, we divide your portfolio into 3 wedges. How much is in each wedge depends on your income needs:

The 1st wedge has the money you need (or want) in the short term and is invested in low risk cash assets like high interest savings accounts or money market funds. My clients know I like them to have at least 12 months of income in this portion of the wedge. For example, if you’re withdrawing $500 a month for expenses, you should have about $6000 in this wedge. 

The 2nd wedge is invested in low volatility fixed income investments such as a monthly income funds or bond funds. These types of investments create a relatively stable portion in the portfolio that may grow but without taking on too much risk. 

The 3rd wedge is invested in the asset mix that suits your individual investment and risk profile. Typically, this wedge is made up mostly of dividend earning equity funds and is where most of the growth in the portfolio happens. However, their values change daily and we don’t want to have to sell an investment from this portion of the portfolio to provide income or we could lose capital permanently. 

Cash Wedge Pie Chart

Wedge #1 is replenished from the less volatile short-term fixed income investments in wedge #2. Wedge #2 is replenished when we have growth and dividend earnings from wedge #3. Breaking out your portfolio in this way allows us to manage the withdrawal risks and enables us to secure your income without losing out on potential growth from equity markets. 

This type of strategy is good regardless of whether you’re withdrawing only the Minimum Annual Payment (MAP) once a year from your Retirement Income Fund (RRIF) or if you’re supplementing your monthly income to offset expenses. It’s designed especially for registered accounts as there are other, tax efficient, strategies we can incorporate with non-registered funds like Return of Capital (ROC), but that’s a topic for another article.